Salary Compensation That's Easy, But Might Disrupt Hierarchy

Advantages and disadvantages of market-based salary compensation

First and most importantly, this form of salary compensation ensures market relevance. If you look at some of the old point factor systems, you can lose touch with the market. One example of that may be a government client. They had a number of social workers on their payroll and they had a point factor system which essentially assigns points or assigns salary compensation dollars based on your level of problem-solving, decision making, supervision, education, and experience rather than the market.

If you think about the role of social worker, it oftentimes requires a master’s degree. Some might have a lot of experience, high decision making, high problem-solving. It scored very high within that system. Even though the market for pay was $40,000, this client was paying $80,000 a year for their social worker because of the system. That’s an extreme example.

If you like at the opposite end of the spectrum, you think about IT workers back in 1999 when that was a hot area. A lot of them had high school decrees. They were very young. Now, they were exceptionally bright but if you look at education and experience and some of those factors, that scores very low. An old point factor system may say that that job should be paid but these people were making $80,000 a year because that’s what the market dictated for their skills.

Secondly, it’s easy to administer. You don’t have all kinds of points and things that employees can learn how to game a system. The market data are what the market are! The point is that the market data dictate how we pay our jobs.

Because we’re using salary structures, we have administratively created a system that HR can use to proactively manage salary compensation in terms of entry level pay through maximum compensation. It’s going to look at what does the market pay for these duties and responsibilities.

On the downside, market-based salary compensation can cause a shift in your current hierarchy. In other words, you may have had historically two jobs that were seen as peers. Years ago, it was accountants and RN’s. They were typically paid about the same amount. Well then, we started to have shortage of RN’s and RN’s started to take on more and more responsibility and take it away from the docs so that the docs could focus on things that they were uniquely able to do. Pay for RN’s went through the roof. The market created a disconnect.

Now with the passage of Sarbanes-Oxley, accounting pay started to catch up. The point is that hierarchy that says we pay RN’s and accountants the same amount, we may have done that for 30 years. Now we’re going to look at the market for these roles individually.

Edited Remarks from “How to Set Pay Ranges That are Fair and Effective” by Edward Rataj

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